Penalty clause, coercive fine, withdrawal clause, deposits and down payments: how to secure your payments in France?

On a file of unpaid amounts or contractual termination, the creditor often has a very simple frustration: the contract “says” that it is right, but obtaining quick compensation remains difficult. In practice, French law offers several contractual tools — sometimes confused, sometimes misused — which can transform a simple “disagreement” into a pressure lever, then into an enforceable title.

Among these tools, one finds the penalty clause (the most used), but also neighbouring mechanisms: coercive fine, withdrawal clause, deposits, down payment. Each responds to a different logic. And above all: each obeys different rules, notably on a crucial point for recovery: can the judge reduce the amount? Is a formal notice required? Can one cumulate with damages?

This article explains in a detailed manner:

• what a penalty clause is and how it works,
• what the debtor can contest,
• how the creditor can draw a concrete advantage from it (including in fast procedures),
• how to avoid the trap of the “penalty” that the judge reduces,
• and how to choose between penalty clause, withdrawal clause, deposits or down payment according to your objective.

1. The penalty clause: definition and economic logic

1.1 What is a penalty clause?

The penalty clause is a clause of a contract by which the parties fix in advance, in a lump-sum manner, the amount of the compensation due in case of non-performance or poor performance of an obligation. This definition is today attached to the Civil Code, article 1231-5.

The idea is the following: instead of debating for months (or years) to prove your exact loss, you agree from the signature of the contract that, if such obligation is not respected, such amount will be due.

1.2 What is a penalty clause really used for?

In recovery, the penalty clause serves essentially three things:

• To deter: increase the cost of default to incite the debtor to perform.
• To simplify proof: you do not have to demonstrate precisely the loss in the same proportions as for “classic” damages.
• To accelerate: a clearly written contractual penalty can facilitate recovery procedures and reinforce your negotiation position (and sometimes your chances in interim proceedings, depending on the context).

But the penalty clause is not a magic wand: if it is badly drafted, it can be reduced, neutralised, or become a source of additional litigation.

2. The “automatic” nature of the penalty clause: what this means (and what it does not mean)

2.1 Automatic does not mean “unassailable”

It is often said that a penalty clause is “automatic”. In practice, this means that if the obligation is not performed as agreed, the penalty becomes due according to the provided conditions, and the creditor does not necessarily have to prove a loss in the same scheme as for a standard indemnity claim.

However, “automatic” does not mean that the debtor cannot contest anything, that the judge has no power, or that the creditor can always claim it without any prior formality.

French law strongly frames the use of the penalty clause to avoid it becoming an abusive instrument.

2.2 The key point in recovery: formal notice

In matters of unpaid amounts, one of the most important points is the following: in many situations, the creditor must have put the debtor on formal notice before claiming the amount of the penalty clause (except definitive non-performance, a hypothesis little adapted to a simple unpaid amount).

The Court of cassation has recalled it: formal notice is, in principle, a condition to claim the penalty clause in a context of obligation to pay (therefore of unpaid amount).

If you want the penalty clause to truly serve recovery, your process must integrate: a solid, dated, traceable formal notice, and ideally compliant with the contract (notification address, modalities, etc.).

2.3 Can one provide “without formal notice”?

In contractual practice, certain clauses provide that the penalty is due “as of right, without formal notice”. This is a drafting choice which aims to accelerate enforceability.

Attention: this does not always dispense with an act of formal notice in contentious practice (if only to “crystallise” the file), but this reinforces your argumentation and limits discussions.

3. The debtor’s rights: payment deadlines and reduction of the penalty

3.1 The debtor can ask for deadlines (grace periods)

Even when the penalty clause is due, the debtor can attempt to obtain payment deadlines before the judge (mechanism of grace periods).

Recovery impact: a file “won” on the principle can become “spread out” in time. Hence the importance of combining penalty clause + interest + procedural strategy.

3.2 The debtor can ask for reduction if the clause is manifestly excessive

The Civil Code, article 1231-5, gives the judge the power to moderate (reduce) or on the contrary increase the penalty if it is manifestly excessive or manifestly derisory.

This is the big difference between the penalty clause and other mechanisms like deposits (which the judge does not reassess in the same logic).

Consequence: a too aggressive penalty clause can lose part of its effectiveness if you end up before a judge.

4. The practical usefulness for the creditor: pressure, fast recovery, collective proceedings

4.1 A real pressure lever (but to calibrate)

An effective penalty clause is rarely “symbolic”. It must be sufficiently significant to incite the debtor to pay, but not to the point of appearing objectively disconnected from the economy of the contract.

The right calibration depends notably:

• on the type of contract (sale, services, distribution, leasing, commercial lease, etc.),
• on the margin,
• on the frequency of unpaid amounts,
• on the debtor’s capacity to contest,
• and on the risk of a “moderating” judge.

4.2 Penalty clause and accelerated procedures: what you must understand

In recovery, speed counts. A well-structured penalty clause can:

• reinforce a file in interim proceedings (if the obligation is hardly contestable),
• or simplify the claim in certain recovery schemes.

But attention: if the debt (or the penalty) is seriously contestable, the interim judge can refuse to rule on the merits. The penalty clause helps, but it does not remove the necessity of a solid evidentiary file (contract + performance + invoice + formal notice + proofs of default).

4.3 In case of collective proceedings: declare the penalty clause (with vigilance)

If your debtor falls into safeguard / restructuring / liquidation, the rules change: the creditor must declare its claim. The penalty clause can be integrated into the declaration depending on the circumstances (and subject to validity).

Major vigilance point: the penalty clause must not be drafted like a “special bankruptcy-filing penalty”. Clauses which increase the debt only in case of collective proceedings can be struck by nullity in certain schemes, because they offend the public order of collective proceedings.

Translation: if you want a “collective-proceedings compatible” penalty clause, it must sanction contractual non-performance (delay, unpaid amount, wrongful termination), not “the fact of entering into collective proceedings”.

5. Penalty clause vs damages: the prohibition of double payment for the same loss

A frequent trap: the creditor claims at the same time the amount of the penalty clause, and “classic” damages for the same loss.

French law limits this cumulation: one cannot be compensated twice for the same loss. The penalty clause is designed as a lump-sum compensation. If you claim in addition damages for the same economic reality, you expose yourself to a partial rejection.

Thus, a penalty clause can be used for a type of “lump-summed” loss (delay, disorganisation, internal costs, etc.), whereas damages can be claimed only for a distinct loss not covered by the penalty (if the contract and the facts justify it).

6. How to draft a penalty clause that “holds” and serves recovery

6.1 The criteria of a useful penalty clause

A “useful” penalty clause is not only a sentence. It must be a procedural tool.

Clear trigger: which obligations? which exact event? (payment delay, non-respect of a delivery time limit, early termination, etc.).

Clear amount or calculation method: lump sum, percentage, scale.

No ambiguity on cumulation: does it cumulate with late interest? with recovery fees? with termination clauses?

Formal notice: required or not, and by which channel (registered letter with acknowledgement of receipt, email, platform).

Proportion: avoid the “manifestly excessive” which invites the judge to reduce.

Multi-jurisdiction compatibility (if international contract): applicable law, competent court, enforcement in France.

Proof: clause aligned with your processes (delivery notes, acceptance reports, tickets, emails, etc.).

6.2 Examples

Without giving a “magic rate”, one often sees: a percentage of the unpaid amount (e.g., 10% to 20%) to deter, and/or a capped daily penalty in case of delay of technical performance.

But a penalty that represents an overwhelming part of the contract without economic justification can be attacked.

7. Judicial revision: when and how a judge reduces (or increases) a penalty clause

7.1 The judge’s power: moderation or increase

Article 1231-5 gives the judge a power of correction, even of its own motion, if the penalty is manifestly excessive or derisory.

7.2 “Manifestly excessive”: the control standard

In practice, the judge compares:

• the amount of the penalty,
• and the economy of the contract / the estimable loss / the interest of the obligation.

The criterion is not “a little too high”, but “manifestly” disproportionate. Decisions require that the reasoning be serious when the judge moderates.

7.3 “Manifestly derisory”: rare, but possible

A penalty clause can also be increased if it is derisory in view of the loss. It is rare, but it happens in contracts where the penalty was undervalued and becomes almost symbolic, making the contract unbalanced to the detriment of the creditor.

7.4 Partial performance: proportional reduction possible

When the obligation has been performed in part, the judge can reduce the penalty in proportion to the interest that the partial performance has provided to the creditor (logic of equity contractualised by the Civil Code).

Operational consequence: if your opponent has performed “a little”, it will try to valorise this partial performance to reduce the penalty. Hence the importance of documenting what is really missing and the impact.

8. Neighbouring clauses: why certain “astreintes” are in reality penalty clauses

8.1 Contractual coercive fine vs judicial coercive fine: attention to vocabulary

In French law, a judicial coercive fine is pronounced by a judge to compel someone to perform (and must be “liquidated” afterwards).
But in contracts, many parties use the word coercive fine to designate a daily penalty provided in advance.

Now, if a contractual stipulation:

• fixes in advance a sum due in case of non-performance,
• and aims to deter and compensate,

it can be reclassified as a penalty clause, therefore revisable by the judge via article 1231-5.

Implication: calling a clause “coercive fine” does not make it untouchable. The judge looks at the function, not the label.

8.2 Enjoyment indemnities, recovery indemnities: risk of reclassification

Same logic for clauses which, under cover of “fees”, in reality provide a lump-sum sanction: they can fall under the regime of the penalty clause (and therefore be reduced if excessive).

Recovery advice: if you wish for a “non-revisable” indemnity, the solution is not to change the title; it is to choose the appropriate mechanism (sometimes the withdrawal clause, sometimes a true price of additional service, sometimes a well-structured termination clause).

9. Withdrawal clause: pay to free oneself (and limit the risk of reduction)

9.1 Definition: the “exit price” of the contract

The withdrawal clause is not a sanction of non-performance. It is a clause which gives to a party the faculty to withdraw from a contract by paying an agreed price.

Logic:

• either I perform,
• or I renounce, and I pay the withdrawal price.

This difference is fundamental. In principle, the withdrawal price does not have the same nature as a penalty clause, which reduces the risk of judicial moderation in certain hypotheses (case law has distinguished it in cases where lower courts had tried to reduce an indemnity which was in reality a withdrawal price).

9.2 The trap: the false withdrawal price which is in reality a penalty clause

Many “withdrawal prices” are reclassified as penalty clauses when they:

• have a clearly dissuasive effect,
• sanction a wrongful termination,
• or reproduce in reality the total remaining price due as if the contract had been performed until term.

If the “withdrawal price” is equivalent to the full price of the contract, judges can consider that it aims to compel performance and that it assesses in advance a loss: it is then a disguised penalty clause, therefore revisable.

9.3 When to prefer the withdrawal clause?

The withdrawal clause is commonly preferred when it helps properly structure an exit option in long-term contracts, secure a minimum economic return if the counterparty withdraws, and reduce the risk of judicial reduction—provided the mechanism genuinely operates as an option.

10. Down payment vs deposits: two words, two opposite legal effects

It is an extremely important point, because a simple confusion can make your file swing: the client believes it is “committed”, but in reality it can disengage; or conversely.

10.1 The down payment (“acompte“): the contract is firmly concluded

The down payment is part of the price. The payment of a down payment means in principle that the contract has been definitively concluded: the buyer cannot free itself by “abandoning” the down payment. It remains bound to pay the balance (except exceptions and litigation specific to the contract).

This is why the down payment is a useful tool for the creditor: it materialises the commitment and reduces the risk of opportunistic withdrawal.

But attention: the down payment is not a penalty clause. If you want the down payment to be “kept” as a sanction in case of non-performance, a specific clause is needed, and this clause can then be analysed as penal (and therefore revisable if excessive).

10.2 Deposits (“arrhes“): the freedom to withdraw (article 1590 of the French Civil Code)

Deposits function in the opposite way: they give to each of the parties the possibility to withdraw:

• the one who has paid the deposits can renounce and lose them,
• the one who has received them can renounce but must return double.

This is the mechanism of article 1590 of the French Civil Code.

10.3 Contracts with consumer: presumption of deposits (L.214-1 of the French Commercial Code)

In sales contracts or services contracts concluded between a professional and a consumer, the Consumer Code provides, unless contrary stipulation, that sums paid in advance are deposits (within the meaning of article 1590), with the consequence: possibility to withdraw.

Why is it important in recovery? Because if you are a professional and your client is a consumer, you cannot always treat the advance as a down payment “locking” the contract, except a clear and accepted clause.

11. Templates: examples of clauses (to adapt)

The below templates are examples of structure. They must be adapted to the contract, the sector, the relationship (B2B/B2C) and the risks of imbalance.

11.1 Example of penalty clause (payment delay)

“In case of non-payment at the due date, the debtor will be liable, in addition to the principal, for a lump-sum indemnity of X% of the unpaid sums, due as of right from the day after the due date.”

Good practices: specify the due date, specify the calculation method, and coordinate with interest and fees.

11.2 Example of daily penalty (delay of performance)

“Any delay in delivery beyond the agreed date will entail the payment of a penalty of X € per calendar day of delay, capped at Y% of the price.”

Advice: the cap helps to limit the “manifestly excessive” argument.

11.3 Example of withdrawal clause

“Each party may end the contract before its term subject to notifying a notice period of X days and paying a withdrawal indemnity of X €, corresponding to the price agreed for the faculty of early termination.”

Advice: explaining the economic logic (option price) strengthens the qualification as withdrawal clause.

11.4 “Deposits” mention (if you want this logic)

“The sums paid in advance have the nature of deposits within the meaning of article 1590 of the Civil Code.”

11.5 “Down payment” mention (if you want the firm commitment)

“The sums paid in advance constitute a down payment on the price, amounting to a firm commitment of the parties.”

Advice: reinforce with a clause of proof of acceptance and of non-withdrawal (depending on the type of contract).

12. Conclusion: the right clause, in the right place, at the right level

The penalty clause is a powerful instrument, but only if it is:

• correctly triggered (formal notice, due date, proof),
• calibrated (dissuasive effect without manifest excess),
• coherent with the rest of the contract (termination, interest, fees, proof, jurisdiction),
• and used in a structured recovery strategy.

Neighbouring mechanisms — contractual coercive fine (often reclassified), withdrawal clause, deposits and down payment — must be chosen according to the objective: pressure, exit option, firm commitment, or commercial flexibility.